Advent 7 Pty Ltd and Commissioner of Taxation
[2014] AATA 365
•10 June 2014
[2014] AATA 365
Division TAXATION APPEALS DIVISION File Number(s)
2012/4690-4691
Re
Advent 7 Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 10 June 2014 Place Sydney The decisions under review are affirmed.
........................[SGD]................................................
Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION — Goods and Services Tax — Applicant claimed Input Tax Credits on Business Activity Statements — Whether claims for Input Tax Credits can be Substantiated — Whether Penalties should be Imposed for Recklessness
LEGISLATION
A New Tax System (Goods and Services Tax) Act1999 (Cth) – ss 9-5; 11-5; 11-15; 11-20; 25-55; 29-10;
Taxation Administration Act 1953 (Cth) - Schedule 1 ss 284-75(1); 284-75(5); 284-75(6); 284-7571); 284-80(1) 284-85; 284-90; 298-20; 298-30
CASES
Bayconnection Property Developments Pty Ltd and Commissioner of Taxation [2013] AATA 40
BRK (Bris) Pty Ltd v FCT [2001] FCA 164
Harland as Trustee for PCS Global Discretionary Trust "and" Commissioner of Taxation [2013] AATA 930
RV Investments (Aust) Pty Ltd as Trustee for the RV Unit Trust v Commissioner of Taxation [2014] AATA 158
Shawinigan Ltd v Vokins & Co Ltd [1961] 3 All ER 396REASONS FOR DECISION
Professor R Deutsch, Deputy President
10 June 2014
This is an application for review by the Tribunal of a decision of the Commissioner of Taxation (“the Respondent”), dated 20 August 2012, to, inter alia,:
(a)Reduce the input tax credits (“ITC”) for Goods and Services Tax (“GST”) purposes of the Applicant from the claimed amount of $404,491 to nil; and
(b)Impose a penalty of $202,245.50 for recklessness in making Business Activity Statements to the Australian Taxation Office (“ATO”).
FACTUAL BACKGROUND
The Applicant was incorporated on 18 May 2006. It was registered for GST on 4 June 2008 – for GST purposes it had quarterly tax periods and accounted for GST on a non-cash basis.
At the time of registering for GST and up to 2009 the Applicant’s main business activity was computer system design. After 2009, the Applicant asserts it changed its business model and began marketing licensed computer software, in particular power management software products.
Mr David Soo (“Mr Soo”) was a director and public officer of the Applicant during the relevant period. Mr Soo was also a director of the following related entities during the relevant period:
Name of entity
Business Name/s
Business
Virtual Resource Management Solutions Pty Ltd
Advent Group
Advent 8
Computer design and related services
Advent 8 Pty Ltd
Computer design and related services
Advent 9 Pty Ltd
Buffet Media
Advertising services enterprise
Access Only Pty Ltd
Internet service provider and web search portal
The Applicant, in its quarterly Business Activity Statements (“BAS”) for the relevant tax periods (1 April 2008 to 30 June 2011), claimed a total of $404,491 in ITCs. A summary provided by the Respondent of the Applicant’s BAS for those tax periods is as follows:
Period ended
Year
Input tax credits claimed
30 June
2008
451
30 September
2008
0
31 December
2008
0
31 March
2009
0
30 June
2009
29,288
30 September
2009
22,766
31 December
2009
21,050
31 March
2010
27,043
30 June
2010
60,788
30 September
2010
57,089
31 December
2010
66,053
31 March
2011
60,195
30 June
2011
60,178
TOTAL
404,491
Services provided by VRMS Pty Ltd
The Applicant claimed ITCs in respect of services said to have been provided by VRMS Pty Ltd (“VRMS”) during the relevant period. Mr Soo was the sole director of VRMS during the relevant period, which accounts for GST on a cash basis.
The following invoices for, inter alia, “Monthly business consulting and management” were issued by VRMS to the Applicant during the relevant period:
Date
Invoice No
Reference*
Amount
1.
1/01/2009
52
T7-76
$50,000
2.
1/22009
53
T7-76
$50,000
3.
1/3/2009
54
T7-76
$50,000
4.
¼/2009
55
T7-76
$50,000
5.
1/5/2009
56
T7-76
$50,000
6.
1/6/2009
57
T7-76
$50,000
7.
1/7/2009
59
T7-76; T15-205
$60,000
8 .
1/8/2009
60
T7-76; T15-206
$60,000
9.
1/10/2009
61
T7-76; T15-207
$60,000
10.
1/10/2009
78
T7-76
$66,000
11.
21/10/2009
69
T7-76
$5,808
12.
21/10/2009
70
T7-76
$5,808
13.
1/11/2009
79
T7-76
$66,000
14.
1/12/2009
80
T7-76
$66,000
15.
1/1/2010
81
T7-76
$66,000
16.
1/2/2010
83
T7-76
$66,000
17.
1/2/2010
84
T7-76
$5,808
18.
1/2/2010
85
T7-76
$5,082
19.
1/2/2010
86
T7-76
$5,082
20.
1/3/2010
87
T7-76
$66,000
21.
31/3/2010
88
T7-76; T7-85
$5,082
22.
29/3/2010
89
T7-76
$5,082
23.
29/3/2010
90
T7-76
$5,082
24.
1/4/2010
100
T7-76
$77,000
25.
1/5/2010
101
T7-76
$77,000
26.
1/6/2010
102
T7-76
$77,000
27.
30/6/2010
104
T7-76
$231,000
28.
30/9/2010
No number
T7-77
$264,000
29.
1/9/2010
110
T7-77
$363,000
30.
29/12/2010
116
T7-77; T16-216
$242,000
31.
31/12/2010
117
T7-77 (No invoice number); T16-217 (Invoice number 117); T7-86
$264,000
32.
30/12/2010
118
T7-77 (No invoice number); T16-218 (Invoice number 118);
T7-86
$220,000
33.
31/3/2011
121
T7-77
$297,000
34.
31/3/2011
122
T7-77
$352,000
TOTAL
$3,382,834
*References to entries commencing with a T are to documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth)
The invoices rendered by VRMS stated payment terms as being “net 30th after EOM”. In respect of many of these invoices, it remains a matter of disagreement as to whether they were ever in fact paid. It is however clear from the evidence that most of the invoices were not paid and VRMS has not attempted to collect on such outstanding invoices..
There is no written agreement between the Applicant and VRMS in respect of, inter alia:
(c)The services VRMS was to provide to the Applicant;
(d)The basis on which VRMS was to charge the Applicant for those services;
(e)Invoicing arrangements, including the frequency and timing of invoices rendered by VRMS;
(f)The manner and timing of payments to be made by the Applicant to VRMS in respect of any services to be provided by the latter; and
(g)Interest payable in respect of outstanding invoices.
Services provided by Suze Farquhar Consulting Pty Ltd
The Applicant claimed ITCs in respect of the certain invoices for, inter alia, “Marketing Consulting Services” issued by Suze Farquhar Consulting Pty Ltd (“Farquhar Pty Ltd”). Ms Susan Farquhar (“Ms Farquhar”) was, during the relevant period, the sole director and shareholder of Farquhar Pty Ltd, a director of Advent 9 Pty Ltd and an employee of the Applicant.
There was some disagreement at the hearing as to exactly which invoices resulted in input tax credit claims. It was agreed that the following invoices did result in such claims:
Date Invoice No Reference Amount 1. 1/6/2009 701 T7-76; T14-178 $22,000.00 2. 1/7/2009 702 T7-76; T14-179 $22,000.00 3. 1/8/2009 703 T7-76; T14-180 $22,000.00 4. 1/9/2009 704 T7-76; T14-181 $22,000.00 5. 1/10/2009 705 T7-76; T14-182 $22,000.00 6. 1/11/2009 706 T14-183 $22,000.00 7. 1/12/2009 707 T14-184 $22,000.00 8. 1/1/2010 708 T7-76; T14-185 $22,000.00 9. 1/2/2010 709 T7-76; T14-186 $22,000.00 10. 1/3/2010 710 T7-76; T14-187 $22,000.00 TOTAL $220,000.00
In addition, the following invoices were disputed as to whether they resulted in ITC claims: the Applicant asserted they did not and the Respondent asserted that they did.
Date Invoice No Reference Amount 11. 1/04/2010 711 T14-188 $22,000.00 12. 1/05/2010 712 T14-189 $22,000.00 13. 1/06/2010 713 T14-190 $22,000.00 14. 1/07/2010 714 T14-191 $14,000.00 15. 1/08/2010 715 T14-192 $14,000.00 16. 1/09/2010 716 T14-193 $14,000.00 17. 1/10/2010 717 T14-194 $14,000.00 18. 1/11/2010 718 T14-195 $14,000.00 TOTAL $150,000.00
The invoices rendered by Farquhar Pty Ltd did not identify payment terms and whether or not any of these invoices were ever in fact paid remains a disputed fact. Clearly a large number were never paid and Farquhar Pty Ltd has not attempted to collect on any of the outstanding invoices.
There is no written agreement between the Applicant and Farquhar Pty Ltd in respect of:
(a)The services Farquhar Pty Ltd was to provide to the Applicant;
(b)The basis on which Farquhar Pty Ltd was to charge the Applicant for those services;
(c)How, if at all, any services to be provided to the Applicant by Farquhar Pty Ltd were to be distinguished from work done by Ms Farquhar as an employee of the Applicant or any other related company;
(d)Invoicing arrangements, including the frequency and timing of invoices rendered by Farquhar Pty Ltd;
(e)The manner and timing of payments to be made by the Applicant to Farquhar Pty Ltd in respect of any services to be provided by the latter;
(f)Interest payable in respect of outstanding invoices.
Applicant’s sales records
During the relevant period, the Applicant’s sales register records sales in the amount of $40,713.78. Those sales were as follows:
Date
Customer Name
Reference
Amount
18/08/2009
Police Integrity Commission
T7-73; T7-74
$3,889.28
24/2/2010
Singtel Optus Pty
T7-73
$2,304.50
8/04/2010
Lake Macquarie Council
T7-73
$28,800
29/04/2010
Richmond Valley Council
T7-73
$5,720.00
TOTAL
$40,713.78
On 18 and 28 October 2011, the Applicant provided the Respondent with copies of its statutory accounts for the financial years ending 30 June 2009 and 30 June 2010, as well as various bank statements for the latter financial year. The Applicant also provided information as to its debts, creditors and GST control account breakdown, which indicates that the Applicant was unable to pay its debts as and when they fell due as at 1 July 2009.
During the periods 1 April 2008 to 30 March 2011 the Applicant did not engage in any tendering for work.
Audit
The Applicant was subject to an audit of its BAS for the relevant period.
During the Audit, the Applicant indicated that it formed part of a group of related entities and it seems. Those entities were financed at least in part by a combination of funds provided by way of:
·an inheritance received by Mr Soo;
·loans from Mr Soo’s wife;
·research and development grants; and
·GST refunds received from the ATO
As a result of the audit, the Respondent determined the Applicant was not carrying on an enterprise and was not entitled to be registered for GST during the relevant period. This resulted in:
(a)The reversal of a total of $404,491 in ITC; and
(b)The application of an administrative penalty of 50% of the shortfall amount on the basis that the Applicant’s behaviour amounted to recklessness as to the operation of a tax law.
The Respondent issued two Notices of Assessments as a result of the audit: one, issued 14 December 2011, regarding the net amount for ITCs in the relevant period and the second, issued on 19 December 2011, for liability to pay a penalty for the relevant period.
Objection
On 26 April 2012 the Applicant objected against the Notice of Assessments of net amount dated 14 December 2011 and Notice of Assessments and liability to pay penalty dated 19 December 2011.
The basis of the objection was that:
(a)The Applicant was entitled to be registered for GST and was registered;
(b)The cancelation of the Applicant’s registration for GST was invalid because the Respondent had not complied with s 25-55 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”);
(c)The Applicant was entitled to the ITCs claimed on the BAS it lodged between 1 July 2007 and 30 June 2011;
(d)The Applicant was carrying on an enterprise during the relevant period and the Respondent has disregarded information that demonstrated this; and
(e)The Respondent had incorrectly assessed the administrative penalty by determining that the actions of the Applicant which resulted in the tax shortfall were reckless.
On 20 August 2012 the Respondent issued a Notice of Objection Decision. The Applicant’s objection was disallowed on the bases that, inter alia:
(a)The Applicant was not carrying on an enterprise during the relevant period;
(b)The Applicant was not entitled to ITCs totalling $404,491 as the relevant acquisitions were not “creditable acquisitions” for the purposes of section 11-20 of the GST Act;
(c)If contrary to (a) and (b) immediately above, the relevant acquisitions were creditable acquisitions, the ITCs were not attributable to the tax periods in which they were claimed;
(d)In the alternative, the purported supplies and acquisitions between the Applicant and VRMS, and between the Applicant and Farquhar Pty Ltd, were a sham in that the arrangements underpinning them were never intended to create legally enforceable obligations;
(e)The penalty for recklessness was correctly imposed; and
(f)The Respondent was correct in not exercising his discretion to remit the administrative penalty in whole or in part.
On 18 October 2012, the Applicant applied to the Administrative Appeals Tribunal (“the Tribunal”) for a review of the Respondent’s objection decision.
Somewhat belatedly, the Respondent conceded the issue regarding enterprise and no longer contends that the Applicant was not carrying on an enterprise during the relevant period. However, the Respondent maintains the other bases for disallowing the Applicant’s objections.
LEGISLATIVE FRAMEWORK AND PRINCIPLES
This case raises the application of a number of the statutory provisions dealing with GST and penalties and the key provisions are set out below.
GST Legislation
Section 11-20 of the GST Act provides:
You are entitled to input tax credits for any creditable acquisition that you make.
Section 11-5 of the GST Act provides:
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide, or are liable to provide, consideration for the supply; and
(d) you are registered, or required to be registered.
Section 9-5 of the GST Act provides:
You make a taxable supply if:
(a) you make the supply for consideration; and
(b)the supply is made in the course or furtherance of an enterprise that you carry on; and
(c) the supply is connected with Australia; and
(d) you are registered, or required to be registered.
“Creditable purpose” is defined in s 11-15 of the GST Act. That section provides:
Meaning of creditable purpose
(1)You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.
(2)However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be input
taxed; or(b) the acquisition is of a private or domestic nature.
Section 29-10 of the GST Act sets out the rules for attributing ITCs for creditable acquisitions made during a tax period:
If you do not hold a tax invoice for a creditable acquisition when you give to the Commissioner a GST return for the tax period to which the input tax credit (or any part of the input tax credit) on the acquisition would otherwise be attributable:
(a)the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and
(b)the input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.
However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.
Penalty
Section 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (“the TAA 1953”) provides:
You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law ...;
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted.
Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.
Exceptions
Section 284-75(5) of Schedule 1 to the TAA 1953 provides:
You are not liable to an administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your agent (if relevant), took reasonable care in connection with the making of the statement.
Section 284-75(6) of Schedule 1 to the TAA 1953 provides:
You are not liable to an administrative penalty under subsection (1) or (4) if:
(a) you engage a “registered tax agent or BAS agent; and
(b)you give the registered tax agent or BAS agent all relevant taxation information; and
(c) the registered tax agent or BAS agent makes the statement; and
(d) the false or misleading nature of the statement did not result from:
(i) intentional disregard by the registered tax agent or BAS agent of a taxation law;
(ii) recklessness by the agent so as to the operation of a taxation law.
Section 284-75(7) of Schedule 1 to the TAA 1953 provides that:
“If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph 6(b)”.
Determining the Amount
Section 284-80(1) of Schedule 1 to the TAA 1953 provides:
You have a shortfall amount if an item in this table applies to you. That amount is the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Items 1 and 2 of the table in subsection 284-80(1) list the following circumstances relating to a false or misleading statement that gives rise to a shortfall amount:
A tax-related liability of yours for an accounting period, or for a taxable importation...worked out on the basis of the statement is less than it would be if the statement were not false or misleading.
An amount that the Commissioner must pay or credit to you under a taxation law.. .for an accounting period.. .worked out on the basis of the statement is more than it would be if the statement were not false or misleading.
Section 298-30 of Schedule 1 to the TAA 1953 provides:
(1)The Commissioner must make an assessment of the amount of an administrative penalty under Division 284.
(2)An entity that is dissatisfied with such an assessment made about the entity may object against it in the manner set out in Part IVC of the [TAA 1953].
…
The assessment of the amount of penalty under s 298-30 is to be made in accordance with the formula set out in s 284-85 of Schedule 1 to the TAA 1953, as follows:
(a)Firstly, calculate the base penalty amount under subsection 284-90(1);
(b)Secondly, increase (pursuant to s 284-220) or decrease (pursuant to s 284-225) the base penalty amount if certain conditions are satisfied; and
(c)Thirdly, consider whether all or part of the penalty should be remitted under s 298-20 of Schedule 1 to the TAA 1953.
Section 284-90 of Schedule 1 to the TAA 1953 sets out a table for determining the base penalty amount as a percentage of the shortfall amount, including, inter alia:
an amount of 50% of the shortfall amount where the relevant shortfall amount, or part of that amount, resulted “from recklessness by you or your agent as to the operation of a taxation law” (Item 2); or
an amount of 25% of the shortfall amount where the relevant shortfall amount or part of that amount, resulted from “a failure by you or your agent to take reasonable care to comply with a taxation law” (Item 3).
Remission
Section 298-20 of Schedule 1 to the TAA 1953 provides:
(1) The Commissioner may remit all or a part of the penalty.
(2) If the Commissioner decides:
(a)not to remit the penalty; or
(b)to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
ISSUES
There are three issues raised by the facts and in relation to which the Applicant and the Respondent are in dispute:
(a)whether the Applicant was entitled to claim GST input tax credits under section 11 – 20 of the GST Act during the periods 1 April 2008 to 30 June 2011;
(b)whether the administrative penalty of 50% for recklessness was correctly imposed on the GST shortfall under Division 284 of Schedule 1 to the TAA 1953; and
(c)whether the administrative penalty imposed should be remitted in whole or in part by the Respondent under s 298 – 20 of Schedule 1 to the TAA 1953.
ENTITLEMENT TO CLAIM INPUT TAX CREDITS – THE CONTENTIONS
The Applicant contends that it was entitled to the ITCs claimed during the relevant period because it had acquired services for a creditable purpose from both VRMS and Farquhar Pty Ltd. Importantly, the Applicant contends that those services were acquired by it in carrying on an enterprise originally being one of computer design and thereafter marketing of licensed computer software.
The Respondent contends that the Applicant is not entitled to the ITCs claimed during the relevant period because:
·The Applicant has been unable to demonstrate that acquisitions of any services were actually made – in particular the evidence provided does not reveal the specific nature of the services that were provided and how the amounts charged for such services were calculated.
·Even if there were services acquired, the Applicant cannot demonstrate that it did the acquiring especially in circumstances where the Applicant formed part of a group of related companies including one of the purported suppliers namely VRMS.
·Even if there were services acquired by the Applicant, the supply of those services to the Applicant was not a taxable supply by either of VRMS or Farquhar Pty Ltd (s 11-5(b) of the GST Act) either because the supply was not made for consideration or the supply was not made in the course or furtherance of an enterprise carried on by VRMS or Farquhar Pty Limited.
·For the purposes of s 11-5(c) of the GST Act there was no consideration provided by the Applicant.
·Even if it is determined that the Applicant made creditable acquisitions for the purposes of s 11-5 of the GST Act, the Applicant was not entitled to attribute those acquisitions to the tax periods in which the relevant ITCs were claimed.
The Respondent also contends as an alternative argument that the invoices which formed the basis for the ITCs claimed by the Applicant were a sham in the sense that they were never intended to create legally enforceable obligations. On that basis the ITCs claimed should not be allowed.
PENALTIES – THE CONTENTIONS
The Applicant contends that its behaviour was not reckless and that it had taken reasonable care in claiming all the ITCs amounts.
The Respondent contends that the Applicants behaviour was reckless as to the operation of a taxation law in a number of respects.
REMISSION – THE CONTENTIONS
The Applicant contends that if a penalty would apply by application of s 284-75(1) of Schedule 1 to the TAA 1953, the Respondent should exercise his discretion under se 298-20 of Schedule 1 to the TAA 1953 to remit the penalty in full.
The Respondent contends that the penalty was properly imposed and there is no basis for remission where the shortfall was caused by recklessness as to the operation of a taxation law.
THE TRIBUNAL’S CONCLUSIONS
ISSUE1: Entitlement to claim input tax credits
The evidence presented by the Applicant falls well short of establishing that there were acquisitions which were made for creditable purposes.
The issue is a fundamental one which goes to the heart of the so-called acquisitions that were made by the Applicant from VRMS and Farquhar Pty Ltd.
The Applicant claimed that the invoices issued by VRMS were for the supply of management and resources, including directors fees, technical resources such as data centres, servers, and telephone and internet access, marketing, book keeping, rental space, computer equipment, printing, office furniture and utilities, as well as business loans, the use of intellectual property, travel and staff. However, the materials relied upon by the Applicant do not reveal the specific nature of the services (that were the subject of those acquisitions) said to have been provided by VRMS and Farquhar Pty Ltd.
A limited number of invoices were made available –often the only reference in the invoice to services were a general reference to, inter alia, "monthly business consulting and management" and "marketing consulting services". More detail was provided in some invoices, for example, “conference presentation”, “development of corporate task force”, “communications contract for products and services” and “supplier negotiations”. In most cases it is virtually impossible to determine what such phrases mean and, when pressed at the hearing, Mr Soo, the only witness, was unable to refer to any specific documents that were generated or created as part of the provision of these services.
No further detail was provided by the Applicant and certainly no contemporaneous evidence establishing that VRMS or Farquhar Pty Ltd provided specific identifiable services to the Applicant was made available. The lack of specificity would be odd in any case no matter what the quantum of the ITC claim; the absence of contemporaneous documentary materials to substantiate the purported provision of services which in total exceeded $3.3m and generated ITC claims in excess of $400,000 during the relevant period is of real concern.
Thus, it appears that the Applicant was content to accept invoices totaling over $3.3 m from VRMS based on such vague invoice descriptions as “Monthly business consulting and management”, “marketing consulting services” and “supplier negotiations” and with no documents or other material produced as part of that very substantial contract arrangement.
The Applicant had many opportunities to provide contemporaneous evidence during the audit and objection reviews and even at the hearing but has not done so.
At the hearing there were a number of significant exchanges in cross-examination between Mr Soo and Counsel for the Respondent. Counsel was pressing the witness for some indication of the nature of the services that were provided and the documents or other material that was produced as a result of the work completed particularly by Farquhar Pty Ltd to the Applicant. Two such exchanges are worth quoting in full:
MR O’MAHONEY: Can you point to any documents establishing the scope of the work that was to be provided by Suze Farquhar Consulting?
MR SOO: The scope of the work was – and may become in the form of emails, and I can’t recall, but I believed that there was discussions with respects to the type of work that she was required to perform and what the applicant would accept as services supplied.
MR O’MAHONEY: My question is more specific than that. Can you point to a document that indicates “Dear Ms Farquhar or Dear Suze Farquhar Consulting Pty Ltd, looking forward to you starting. These are going to be broadly or specifically the sorts of responsibilities and the sort of what we’re wanting you to do”, i.e. the scope of the work, the nature of the services to be provided?
MR SOO: I would have to – that’s not to say that there is not.
MR O’MAHONEY: But the question is can you point to one purported document?
MR SOO: Not before the tribunal. It was not my understanding that there was scope and discussions for that but that was my error.
MR O’MAHONEY: Can you point to a document showing the period of the engagement?---
MR SOO: Well, the period of engagement is stipulated in the accounts. So, it was from - - -
MR O’MAHONEY: We’ll come to the accounts. A document saying we will be retaining you for 9 months or 12 months or 16 months at the outset recording - - -?
MR SOO: I recall something of that nature when we first discussed it with her. It may have been in email form. I know that it was certainly discussed and that’s why we had an entry period which was the beginning of the period which occurred in June 2009. I believe that there is various emails that were exchanged with respects to work that was required to be done and discussions upon those work.
MR O’MAHONEY: You refer to that email, can you point to that document - - -?
MR SOO: I do not have here with me.
MR O’MAHONEY: It’s not here today. Can you point to any documents evidencing the basis on which Suze Farquhar Consulting Pty Ltd was to charge Advent 7 for the services provided?
MR SOO: In discussion with Susan Farquhar, the rates was agreed upon based upon what she had charged former clients and that was in the order of approximately $750 a day. Now, there was - - -
MR O’MAHONEY: But my question was, can you point to the document establishing “Here is the retention or, you know, we’re looking forward to you starting. This is the basis on which you’ll be charging us”?
MR SOO: I cannot. There is no documents in front of the tribunal today that I’m aware of.
MR O’MAHONEY: Are there any documents before the tribunal indicating how regularly she was to invoice? An agreement as to, you’ll be invoicing on the first or the last day of any month?
MR SOO: Once again I don’t have here with me.
MR O’MAHONEY: Are there any documents before the tribunal today indicating more specific terms and conditions on which she was retained, dealing with things like confidentiality issues?
MR SOO: Once again, I can’t recall those documents.
MR O’MAHONEY: So, really there’s no documents evidencing the starting of this engagement or the terms on which Suze Farquhar Consulting was retained but then, as you say, I guess the retention, based on your case then, occurred then are you able to show any documents in the course of this relationship indicating an update from Suze Farquhar Consulting Pty Ltd on how the project was progressing?
MR SOO: I believe so but – and please excuse that these were records that goes back to 2009 and they weren’t requested by the respondent. There was no request by the respondents for any of this, so in some regards I must say that we’re blindsided. That suddenly in this document this has come up because it was never requested and I’m not aware of it occurring in any of the actual audit requests.
MR O’MAHONEY: Mr Soo, I’m asking in the course of this relationship where you say you retained Suze Farquhar Consulting Pty Ltd for you to point to a document that indicates something by way of a project update or a performance review or “Dear Susan, thank you for work on this project. It could have been better on X, Y and Z but it was better than we thought on A, B and C.” Just something in the nature of - - -?
MR SOO: There is undoubtedly emails. There is undoubtedly communications. There is undoubtedly discussions. There is also documents in those folders that points to the work that she’s done.
MR O’MAHONEY: My specific question is a performance update or a performance review?
MR SOO: Well, of course, but I would have to go back to those emails and reference them. It’s not to say that they don’t exist but obviously there was communication. The specific nature of those communications, I can’t recall.
At a later point this line of question and answer continues as follows:
MR O’MAHONEY: Can I ask this, when Suze Farquhar Consulting Pty Ltd was engaged, what was your understanding of what – I think that the evidence bears out that invoices were received in the order of about 20 or 22 thousand dollars each month; does that accord with your recollection?
MR SOO: That’s correct, yes.
MR O’MAHONEY: You say the company was in a position to pay those invoices on retaining this entity; do you say that it was?
MR SOO: Yes, I do.
MR O’MAHONEY: And if I could take you to the start of those invoices at T14-178. This is the first of these invoices that we found. Do you see that?
MR SOO: Yes, I do.
MR O’MAHONEY: And does that refresh your memory? This is one of the invoices that you say reflects work done by Suze Farquhar Consulting?
MR SOO: Yes, I do.
MR O’MAHONEY: Just looking at say this first invoice, it’s rendered on 1 June 2009, do you see the description, the three words, ‘Marketing Consulting Services’?
MR SOO: Yes.
MR O’MAHONEY: Are you able to assist us in pointing to any documents evidencing the work in respect of which this invoice was rendered?
MR SOO: Yes, I believe that they exist in those folders. I would have to look at my statement and go back and tell you where various marketing plans were written by Susan Farquhar, the establishment of the sale systems, the CRM systems, and I would have to go back to emails for those because they were ongoing services that were supplied.
MR O’MAHONEY: But as you sit there now, if I ask you to look at that invoice you couldn’t say, well, here’s two or three tasks that were performed in respect of which that invoice was rendered?
MR SOO: I couldn’t, no.
MR O’MAHONEY: And is it the same with T14-179?
MR SOO: Yes.
MR O’MAHONEY: And is the same really with the other invoices behind - - -?
MR SOO: Yes.
MR O’MAHONEY: Are you able to point to any documents that support the actual amount claimed, like a timesheet from Suze Farquhar Consulting Pty Ltd?
MR SOO: That’s not the way that the invoices or the considerations are rendered. Because the work is of such a nature that it’s not a clock-on, clock-off, the work would be performed over several days or several weeks or several months. The set-up and establishment of the sales system required constant updates and changes, as well as training, to be done. It would have been an administrative nightmare to try and structure and schedule every item in those services that were required.
MR O’MAHONEY: I mean just looking through these invoices, you know, $4,000 a week worth of work is, according to these, being done and all we have to go by, you’d accept, those three words, ‘Marketing Consulting Services’?
MR SOO: I was satisfied that the work was being done.
MR O’MAHONEY: Well, you might have been satisfied, Mr Soo, but I’m asking, I guess, a question that is, are you able to assist us in understanding, just taking as an example T14-189, what work was done in respect of that invoice on the 1 May 2010 was issued?
MR SOO: I’m not too sure whether or not that invoice actually was registered on the applicant’s accounts.
DEPUTY PRESIDENT: That’s in amongst the group that Mr Soo - - -
MR O’MAHONEY: I apologise Mr Soo. Would the answer be if I took you back to the one dated 1 March 2010? You couldn’t say, well, here are a bundle of documents evidencing the work that you did in respect of which that invoice was - - -?
MR SOO: I would have to go back to the emails and the communications and reference the work done.
MR O’MAHONEY: But I’m asking you to do that now. I mean if I said to you, could you explain to me the nature of the work that was performed in respect of which that invoice at T14-187 was rendered, you couldn’t point to the document now to indicate that?
MR SOO: I could point to some marketing plans. I could probably point to some sales charts that as part of her role was to analyse the progression and, once again, they are in the folders but I’d have to reference them. I couldn’t say specifically for that period what work was done.
MR O’MAHONEY: But, Mr Soo, you’ve been on notice of these proceedings for a long time?
MR SOO: I have.
MR O’MAHONEY: You’ve been involved in this dispute for a long time?
MR SOO: I have.
MR O’MAHONEY: And you’ve always understood this dispute to be in part about whether or not certain acquisitions were made?
MR SOO: M’mm.
MR O’MAHONEY: And you’ve understood the Commissioner doesn’t have the supporting documentation to evidence the acquisitions that you say were made?
MR SOO: Sure.
MR O’MAHONEY: Do you accept that and do you accept that you have the burden of proof today?
MR SOO: I do if it was requested. If I - - -
MR O’MAHONEY: Mr Soo, my question is, do you accept you have the burden of proof today?
MR SOO: I have a burden of proof
MR O’MAHONEY: And I’m asking you to, for example, demonstrate the body of work that is reflected in any of these invoices from Ms Farquhar during the relevant period, is the answer you can’t point me to documents to which one particular invoice is referrable?
MR SOO: I don’t know whether or not that was necessary. If I could just go back to the actual sequence – and I’ll go back to the requested information. If you look at the actual objection, the rejection of the objection by the respondent, you will find that there is a generalisation with respect to Susan Farquhar and what she had done or what she had not done and there are significant errors in those documents.
Clearly the only witness, Mr Soo (Mrs Farquhar did not appear as a witness at the hearing) was either unwilling or unable to point to any specific documents or other material to support the very substantial invoiced amounts. When further pressed about a series of 3 invoices issued by VRMS totaling over $700,000 and dated on 3 consecutive days at the very end of 2010, the witness again was less than forthcoming in his responses. The attention of the Tribunal was not drawn to any specific documents that could demonstrate the body of work that had been produced in respect of the substantial invoiced amounts and no document could be identified as showing even at some rudimentary level how the amounts in question were determined.
The absence of evidence on such issues is particularly telling in the present circumstances where there are strong connections between the relevant entities and their officers. For example: Mr Soo was a director and shareholder of both the Applicant and VRMS (one of the purported suppliers to the Applicant during the relevant period); Ms Farquhar was variously the principal of Farquhar Pty Ltd (the other purported supplier to the Applicant), a director of Advent 9 Pty Ltd (a company within the Advent group of which Mr Soo was also director) and an employee of VRMS during the relevant period.
In such circumstances it is even more important that the precise services (if any) provided by VRMS and Farquhar Pty Ltd to the Applicant are clearly articulated and clarity is provided around how any services provided by Ms Farquhar as an employee differ from services she provided as principal of Farquhar Pty Ltd.
Furthermore, the fact that some "tax invoices" were issued by VRMS and Farquhar Pty Ltd to the Applicant does not assist the Applicant in establishing the existence of the services. In Bayconnection Property Developments Pty Ltd and Commissioner of Taxation [2013] AATA 40, the Tribunal (Deputy President Frost and Senior Member Lazanas) said (at [86]):
In Huynh & Nguyen and Commissioner of Taxation [2008] AATA 305...Senior Member McDermott noted that "the tax invoice is the cornerstone of the GST regime. A tax invoice is a document that substantiates a creditable acquisition". We concur with the view that tax invoices are documents of considerable importance; indeed they can represent cash to those seeking to claim ITCs on creditable acquisitions. However, the reality is that a tax invoice does not create a taxable supply; it records one. If a taxable supply did not take place, then a "tax invoice" is meaningless. In other words, documents that are so called "tax invoices" cannot substantiate a creditable acquisition, if in fact there was no supply or acquisition. It must follow that scrutiny of transactions is always essential, particularly transactions between related parties.[emphasis in original]
This approach was followed in RV Investments (Aust) Pty Ltd as Trustee for the RV Unit Trust v Commissioner of Taxation [2014] AATA 158 (at [72]).
In this case the Applicant carries the onus of proof and having regard to that onus, I am not satisfied that services were provided by VRMS or Faquhar Pty Ltd to the Applicant such as to enable the Applicant to claim the GST ITCs in respect of the relevant period.
Having regard to this conclusion it is unnecessary for me to consider the other grounds for denying the ITCs advanced by the Respondent.
ISSUE 2: Penalty
The Respondent assessed the Applicant for an administrative penalty under s 284-75(1) of Schedule 1 to the TAA 1953 and in so doing worked out the amount of the penalty under section 284-90(1) (Item 2) on the basis that the shortfall resulted from recklessness by the Applicant as to the operation of taxation law. At issue is whether the shortfall was due to recklessness.
The meaning of recklessness in this context has been considered judicially in a number of cases.
In BRK (Bris) Pty Ltd v FCT [2001] FCA 164, Cooper J opined (at [77]):
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the ITAA 1936 and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement.
This is not dissimilar to the approach to interpreting recklessness taken in Shawinigan Ltd v Vokins & Co Ltd [1961] 3 All ER 396, where Megaw J said (at 403):
Recklessness is gross carelessness - the doing of something which in fact involves a risk, whether the doer realises it or not; and the risk being such having regard to all the circumstances, that the taking of that risk would be described as “reckless”. The likelihood or otherwise that damage will follow is one element to be considered, not whether the doer of the act actually realised the likelihood. The extent of the damage which is likely to follow is another element...
It is clear from these comments that a finding of recklessness depends on the application of an objective test – the conduct of the relevant taxpayer must fall short of the standard of care which would be expected from a reasonable person in the same circumstances as that taxpayer.
Thus, recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person.
The following key aspects of this case are critical in determining the Applicant’s behavior and whether it amounted to recklessness:
(a) The Applicant lodged BASs for the relevant tax periods in the knowledge and expectation that, on the basis of the statements made in those BASs, a refund would become payable to the Applicant. Indeed, the Applicant appears to have relied in part at least on these refunds to fund its activities;
(b) The Applicant lodged the BASs for the relevant tax periods notwithstanding that it did not have in its possession any meaningful documentary materials establishing that the relevant acquisitions were made, including any materials evidencing that the services referred to in the invoices rendered by VRMS and Farquhar Pty Ltd were actually provided;
(c) The Applicant lodged the BASs for the relevant tax periods in the absence of any supporting documents showing payments made, or consideration provided, by the Applicant in respect of the invoices the Applicant received from VRMS and Farquhar Pty Ltd;
(d) Even after being invited to do so, the Applicant has not provided any meaningful information to support the ITCs claimed in its BASs;
(e) ITCs were claimed for the relevant tax periods in respect of invoices, even though in many cases no payment had been made by the Applicant;
(f) ITCs were claimed by the Applicant notwithstanding that, for the most part, it had no realistic prospects of making payments in respect of the invoices that formed the basis of those tax credits. In this respect, for the most part, not only was no such payment made, the Applicant has not provided any materials indicating that it was in a position to be able to pay those invoices.
Having regard to (a) to (f) immediately above, I am satisfied that a reasonable person in the position of the Applicant would have thought that there was a "real risk that all was not as it should be" (Harland as Trustee for PCS Global Discretionary Trust "and" Commissioner of Taxation [2013] AATA 930 at [156]). Such real risk was heightened by the fact that the Applicant's conduct (as set out at [75] above), occurred in the context of purported transactions between related entities (where the same person was controlling both purported supplier and acquirer), or in circumstances where the purported supplier was controlled by an employee of the Applicant.
In considering recklessness, regard must be had to the "reasonable person in the position of the statement-maker" and whether such a person "would see there was a real risk" that the relevant tax laws would not operate correctly to lead to the assessment of the tax properly payable: BRK at [77]. In this context, it is noteworthy that Mr Soo, the director of the Applicant during the relevant period, had experience as a company director and executive manager.
A reasonable person in the position of Mr Soo, with his background and expertise, would have perceived that there was a real risk that, by causing the Applicant to lodge the BASs it did for the relevant periods in the circumstances set out above, the relevant taxation laws would not operate properly. The Applicant was grossly indifferent as to whether what was stated in the BASs was true or not, and failed to take reasonable care to comply with the applicable taxation laws.
ISSUE 3: Remission
There is no basis for remission of the penalty in circumstances where the tax shortfall was caused by recklessness as to the operation of a taxation law.
The Applicant has not advanced any persuasive grounds for remitting any part of the penalty. Here, the discretion to remit relates to the imposition of a penalty that is determined by reference to conduct that occurs in the context of the GST Act and, as such, regard must be had to the subject matter, object and underlying policy of that legislation.
The penalty regime contained in Schedule 1 to the TAA 1953 is intended to ensure that the revenue is protected. As Deputy President Forgie said in Harland (at [161]):
Its protection requires that taxpayers and those liable to pay tax are open and honest in their dealings with the Commissioner.
In this matter, the Applicant has advanced a position that it was entitled to claim the disputed ITCs in the absence of any principled basis for so doing. In particular, there was no real cogent evidence of the nature of the services provided to the Applicant.
Remission of the penalty in all the circumstances of this case is not consistent with the penalty scheme or with the protection of the revenue.
DECISION
The decisions under review are affirmed.
I certify that the preceding 31 (thirty -one) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President .......................[SGD].................................................
Associate
Dated 10 June 2014
Date(s) of hearing 9 April 2014 Date final submissions received 16 April 2014 Advocate for the Applicant Mr David Soo Counsel for the Respondent Mr G O'Mahoney
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